WALL STREET, CALIFORNIA | SECTOR SPOTLIGHT / JAMES F. PELTZ

Miles to Go? : Sneaker Stocks Are Still on the Fast Track

Fans of sneaker giant Nike Inc. (ticker symbol: NKE) got a scare last week when a report surfaced that nationwide shoe retailer Foot Locker was cutting its Nike orders. Foot Locker, a unit of Woolworth Corp., promptly denied the report, but not before Wall Street analysts had to scramble to reassure investors that they still like Nike's prospects.

In fact, many analysts contend the outlook for the overall athletic shoe industry remains strong after a robust 1996, and they're still recommending not only market leader Nike, but stocks of some competitors as well.

And they're bullish even though the stocks have already been among the Street's fastest sprinters over the last 12 months. Not only has Nike surged 62% in that period, but its, well, archrival, Reebok International Ltd. (RBK), has jumped 71%.

Converse Inc. (CVE)--in the midst of a sizzling comeback--reached $27 a share last month, up fivefold from $5 a year earlier, although it has slipped back recently to $20.50 a share.

A few of the industry's smaller, niche players also are nicely ahead. K-Swiss Inc. (KSWS), the Chatsworth-based maker of tennis shoes and other athletic footwear, is up 50% over the last year to a recent $12.375 a share.

But K-Swiss is the exception among the little players, not the rule. Shares of L.A. Gear Inc. (LA) and Vans Inc. (VANS) have sagged in spite of the industry's gains. And lest anyone think the shoe market's expected growth will kick all the stocks higher, analysts caution that conditions keep getting tougher for the little guys.

"The market is becoming more competitive," said analyst Brett Barakett of Salomon Bros. The shoe business also includes such venerable rivals as Adidas of Germany, whose shares are not listed on U.S. markets, and Fila Holding (FLH) of Italy, whose American depositary receipts trade on the New York Stock Exchange.

Overall, though, the sneaker business still is enjoying solid demand in the United States, spurred by a steady economy and the manufacturers' rapid roll-outs of new styles that keep capturing the public's eye.

Consumers also are showing a willingness to pay higher prices for top-of-the-line athletic shoes, which is boosting sales. Barakett said Nike's most expensive sneakers will climb this year to $180 a pair from $150.

U.S. sales of athletic shoes at the wholesale level totaled $7.4 billion in 1996, up 7.6%--the best percentage gain in five years. Sales are expected to climb between 7% and 10% this year, according to estimates by Barakett and the trade publication Sporting Goods Intelligence.

Companies such as Nike and Reebok also are selling more non-footwear apparel, capitalizing on the widespread awareness of their brand names and adding to their overall sales growth.

All of which is why Barakett currently reserves his "buy" recommendations for Nike, which is trading at about $65.625 a share, and Reebok, at about $49.75 a share.

Another reason Barakett likes those stocks: The cost of hiring famous athletes to tout sneakers has skyrocketed in recent years, and that has "erected barriers to entry in this business" for smaller shoe makers that want to become heavyweights, he said.

"The cost to play in this market has gone up significantly," Barakett said.

When the Foot Locker scare surfaced last week, Barakett was joined in reiterating his support for Nike by analysts Michael Conn at Gruntal & Co. in New York and Jennifer Black Groves at Black & Co. in Portland, Ore.

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But another analyst, Alice Ruth of Montgomery Securities in San Francisco, downgraded Nike to "hold," not because of the Foot Locker report--which she also called "not true"--but because she sees Nike's growth slowing a bit.

Citing Nike's high U.S. market share of 43% and the "increasing strength" of Reebok and Converse of late, "we anticipate a deceleration" in the growth of Nike's future orders, Ruth wrote in a bulletin last week.

As a result, "we think Nike shares have more correction in front of them," she said.

Converse, meanwhile, jumped on the "buy" lists of several analysts recently amid expectations that the

company is returning to the black after several quarters of losses.

Converse has a new management team and is again marketing new styles that offer strong competition to Nike and Reebok, analysts said. Converse has predicted a 50% surge in its first-quarter 1997 orders compared with a year ago.

Analysts are less enthusiastic about Fila's ADRs, however. Although the company's share of the U.S. athletic shoe market is now about 8.5%--ranking it third behind Nike and Reebok--analysts are concerned that Fila will struggle with the fierce competition from the rest of the footwear pack.

They also note that Fila's ADRs, despite dropping sharply from last summer to a recent $63.125 apiece, are still more than three times higher than the $19 they were trading at two years ago.